Slowing pay growth and record employment set puzzle for BoE

Pay growth has slowed to its weakest in six months despite record employment, posing a puzzle for the Bank of England as it decides whether to increase interest rates next month.

Pay including bonuses rose at an annual rate of 2.5% in the three months to May, the Office for National Statistics said.

The rate of increase was slightly lower than the 2.6% recorded in the previous two three month periods. Regular pay growth slowed to 2.7% from 2.78% in the previous two periods. Both figures for pay growth were in line with economists’ average forecast.

Wage growth eased even as the number of people in work increased and the number of people unemployed fell. The employment rate rose from 74.9% a year earlier to 75.7% – the highest since comparable records began in 1971. The unemployment rate of 4.2% was down from 4.5% a year ago and was the joint lowest since 1975.

BoE Governor Mark Carney has said the UK economy appears to be bouncing back after an alarming weather-induced slowdown in the first quarter of 2018.

After delaying a planned rate increase in May the BoE’s policymakers are considering whether to increase borrowing costs from 0.5% at their August meeting.

The monetary policy committee has highlighted expected wage growth as one of the main reasons for considering a rate increase. With pay growth easing and confusion reigning over the path of Brexit, the labour market figures may give the MPC reasons to hold off.

Ian Stewart, chief economist at Deloitte, said: “Low unemployment is yet to generate serious wage pressures and Brexit uncertainties continue to reign. The case for raising interest rates in August may have strengthened, but is hardly compelling.”

BoE deputy governor Jon Cunliffe said on 13 July he thought the BoE should remain cautious over rate rises. Cunliffe was one of two MPC members who voted against the last rate rise in November.